England’s 19 July reopening may boost UK plc but a longer-term approach is needed | Larry Elliott, Economics editor

0 1

This is crunch time. Since March, the lockdown restrictions imposed at the turn of the year in all four UK countries have been eased but only gradually. Given that Britain has been at the forefront of the global vaccine effort, progress in opening up the economy has been relatively slow.

That all changes on 19 July, with a big bang removal of statutory curbs on activity in England. The coming weeks will also see an easing of restrictions in Northern Ireland, Scotland and Wales.

Last week’s growth figures for May showed how small a dividend the UK is getting from the tens of millions of jabs. Output rose by 0.8% – half what was expected by experts – and was almost all accounted for by the hospitality sector. Construction and manufacturing both contracted.

The gradualist approach to easing is now being abandoned in favour of a bonfire of regulations. There are a number of reasons for this: a sharp rise in infection rates has not led to anything like the number of hospitalisations and deaths that were seen in the first months of the year; the Treasury is anxious about the impact of continued restrictions on the economy and the public finances; the cavorting of football fans after every England victory during Euro 2020 suggests compliance with rules and regulations is much weaker than earlier in the crisis and that lockdown fatigue has set in.

Summer is by far the best time to test whether vaccines can break the cycle of infections and lockdowns. The longer strict curbs on activity remain in place the more likely it is that changes in behaviour become entrenched, leading to more job losses and business failures. There are clearly limits in a free society for how much compulsion people are prepared to accept. There should be compelling reasons for the government to resort to legal curbs rather than relying on individuals to take personal responsibility for their own actions.

That said, this is far from a risk-free strategy and if the gamble goes wrong there will be profound consequences: medical, economic, financial and political. Much is riding on the way things pan out over the next six months.

Even on the rosiest of assumptions, the way out of the pandemic is going to be long and difficult. The length and severity of the restrictions means there will be scarring from the events of the past 16 months, with an acceleration of what was already shaping up to be painful structural change. For now, the story is of labour shortages; by the time the furlough comes to an end in September it will be of rising unemployment and the need to find work for those displaced from their old jobs. Only when government support is removed will it be possible to see how many of the firms currently operating with little or no working capital can survive.

Fully opening up the economy from 19 July may change this picture. It could prove to be the catalyst for a splurge of spending as consumers run down the £200bn of savings they have amassed since February 2020. Businesses could start to invest again, easing supply bottlenecks and so ensuring any inflation pressure is transitory.

For this scenario to come to pass, however, the government will have to be prepared to ride out the increase in infection rates that will result from the bonfire of statutory restrictions. Most individuals will behave responsibly but a minority won’t and this group will include some super-spreaders.

Individuals started to become more cautious even before the first lockdown was announced in March 2020. They worked from home more, shunned public transport, went out to the shops less. There may be a repeat of that over the coming months if hospitals once again start to receive more Covid patients.

Sign up to the daily Business Today email

Imposing a third lockdown would come at a cost to the Treasury at a time when it is keen to start repairing the hole in the public finances. Rishi Sunak would be forced to rethink ending wage subsidies and the £20 a week increase in universal credit. There would be a further increase both in Whitehall spending and in public borrowing.

The financial cost of a further lockdown would be dwarfed by the political cost to the government. Boris Johnson has a Houdini-like ability to escape from trouble but it is hard to see how he could wriggle out of such a setback. Even a limited reimposition of restrictions, mask-wearing for example, would be a colossal embarrassment for the prime minister. The latest poll shows Labour’s approach – unlock but at a more gradual pace – has public support. Half of voters thought freedom day should be pushed back beyond 19 July.

Policy support for the economy has been extraordinary. The Treasury has never borrowed more in peacetime than it did last year, and the Bank of England has never before set interest rates as low as 0.1%. Threadneedle Street has also been hyper-active with the electronic printing press, through its quantitative easing programme (QE).

The justification for this policy support is that it will hasten the UK’s return to pre-crisis normality, but this is easier said than done, and in some respects betrays a paucity of ambition. Britain’s welfare system was miserly before the crisis and will be miserly once again when UC is cut. Like other developed countries, the UK now appears permanently saddled with ultra-low interest rates and QE, which have widened wealth inequality by jacking up the value of assets for the benefit of the already well-heeled. There are those who think all that stimulus could and should have been put to better use, by investing in the green transition of the economy for example. Their voices will become a lot louder if the big bang fails.

Read original article here

Denial of responsibility! Swift Telecast is an automatic aggregator of the all world’s media. In each content, the hyperlink to the primary source is specified. All trademarks belong to their rightful owners, all materials to their authors. If you are the owner of the content and do not want us to publish your materials, please contact us by email – [email protected]. The content will be deleted within 24 hours.

Leave A Reply

Your email address will not be published.